Flashback on ECJ Cases – C-332/14 (Wolfgang und Wilfried Rey Grundstücksgemeinschaft GbR) – Input tax deduction correction – Mixed Use buildings

On June 9, 2016, the ECJ issued its decision in the case C-332/14 (Wolfgang und Wilfried Rey Grundstücksgemeinschaft GbR).

Reference for a preliminary ruling — Taxation — Value added tax — Directive 77/388/EEC — Third subparagraph of Article 17(5) — Field of application — Deduction of input tax — Goods and services used for both taxable and exempt transactions (mixed-use goods and services) — Determination of the assignation of goods and services purchased for the construction, use, conservation and maintenance of a building that serves to carry out, in part, transactions in respect of which VAT is deductible and, in part, transactions in respect of which VAT is not deductible — Amendment of the national legislation laying down the method of calculating the deductible proportion — Article 20 — Adjustment of deductions — Legal certainty — Legitimate expectations

Article in the EU VAT Directive

Article 17(5) , 20 of the Sixth VAT Directive (Article 173, 184, 185, 187 of the EU VAT Directive 2006/112/EC).

Article 173
1. In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.
The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person.
2. Member States may take the following measures:
(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b) require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c) authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;
(d) authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;
(e) provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.

Article 184
The initial deduction shall be adjusted where it is higher or lower than that to which the taxable person was entitled.

Article 185
1. Adjustment shall, in particular, be made where, after the VAT return is made, some change occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.
2. By way of derogation from paragraph 1, no adjustment shall be made in the case of transactions remaining totally or partially unpaid or in the case of destruction, loss or theft of property duly proved or confirmed, or in the case of goods reserved for the purpose of making gifts of small value or of giving samples, as referred to in Article 16.
However, in the case of transactions remaining totally or partially unpaid or in the case of theft, Member States may require adjustment to be made.

Article 186
Member States shall lay down the detailed rules for applying Articles 184 and 185.

Article 187
1. In the case of capital goods, adjustment shall be spread over five years including that in which the goods were acquired or manufactured.
Member States may, however, base the adjustment on a period of five full years starting from the time at which the goods are first used.
In the case of immovable property acquired as capital goods, the adjustment period may be extended up to 20 years.
2. The annual adjustment shall be made only in respect of one-fifth of the VAT charged on the capital goods, or, if the adjustment period has been extended, in respect of the corresponding fraction thereof.
The adjustment referred to in the first subparagraph shall be made on the basis of the variations in the deduction entitlement in subsequent years in relation to that for the year in which the goods were acquired, manufactured or, where applicable, used for the first time.

Facts

During the period from 1999 to 2004, Rey Grundstücksgemeinschaft, a property partnership governed by civil law, demolished an old building on a plot of land owned by it and constructed a building for residential and commercial use there. The building was completed in 2004 and contains six residential and commercial units and ten underground parking spaces. Some of those units and spaces were let as early as October 2002.
In the tax years for the period from 1999 to 2003, Rey Grundstücksgemeinschaft calculated its entitlement to deduct VAT paid for the demolition and construction works by applying an allocation key based on the ratio between the turnover generated by the activity, subject to VAT, of letting the commercial units and associated car parking spaces and the turnover arising from the other, VAT-exempt, letting transactions (‘the turnover-based allocation key’). Using that key, the deductible portion of the VAT was 78.15%. Following two actions brought before the Finanzgericht Düsseldorf (Finance Court, Düsseldorf, Germany) concerning the amount of VAT deductible for the 2001 and 2002 tax years, the Tax Office, Krefeld, accepted that allocation key.
In 2004, some parts of the building at issue in the main proceedings which had originally been envisaged to be used for carrying out taxed transactions were ultimately let exempt from VAT. In order to adjust the input tax deductions made, Rey Grundstücksgemeinschaft declared in its return for the 2004 tax year an amount by way of adjustment which it determined by applying the turnover-based allocation key. In that return, Rey Grundstücksgemeinschaft also declared some deductible amounts of VAT which had been paid on goods and services purchased for the use, conservation and maintenance of the building. The total amount of VAT that had to be refunded to Rey Grundstücksgemeinschaft was, according to its calculations, around EUR 3 500.
By tax amendment notice of 1 September 2006, the Tax Office, Krefeld, objected to that outcome on the ground that, following the entry into force, on 1 January 2004, of the third sentence of Paragraph 15(4) of the UStG, the turnover-based allocation key can be applied only if it is not possible to have recourse to another method for the economic allocation of mixed-use goods and services. Since the Tax Office, Krefeld, considered that it is possible and more precise to determine the economic allocation of goods and services used for the demolition or construction of a building by having recourse to an allocation key corresponding to the ratio between the floor area in square metres of the commercial premises and that of the premises for residential use (‘the floor area-based allocation key’), Rey Grundstücksgemeinschaft should, in its view, have applied that key. Consequently, it set the VAT deduction percentage at 38.74%, which corresponds to the part of the total floor area of the building whose letting is taxable, and fixed the amount of VAT to be refunded to Rey Grundstücksgemeinschaft for 2004 at around EUR 950.
The Finanzgericht Düsseldorf (Finance Court, Düsseldorf) partially annulled that tax amendment notice on the ground that the floor area-based allocation key could be applied only in respect of VAT payable on costs incurred from 1 January 2004. Consequently, it fixed the amount of VAT to be refunded to Rey Grundstücksgemeinschaft for 2004 at just over EUR 1 700.
Both parties to the main proceedings appealed on a point of law against that decision to the Bundesfinanzhof (Federal Finance Court).
According to the referring court, the dispute arises, in the first place, from questions connected with the Court’s interpretation of Article 17(5) of the Sixth Directive in the judgment of 8 November 2012 in BLC Baumarkt (C‑511/10, EU:C:2012:689).
The referring court observes that, in that judgment, the Court of Justice held that it is possible to have recourse to a method for allocating mixed-use goods and services that is different from the method, based on turnover, provided for by the Sixth Directive only if that method enables the deduction entitlement to be determined more precisely. The method consisting in determining the part of the building for which VAT has been incurred and applying an allocation key only for the amounts of VAT which do not relate specifically to any of those parts or which relate to the common parts of a mixed-use building would produce more precise results. Consequently, the referring court wonders whether such a method should be preferred.
Also, the referring court observes, in essence, that in paragraph 19 of the judgment of 8 November 2012 in BLC Baumarkt (C‑511/10, EU:C:2012:689) the Court of Justice stated that a Member State may have recourse to a method for allocating mixed-use goods and services other than the method provided for by the Sixth Directive only for a ‘given transaction, such as the construction of a mixed-use building’. The divergent method adopted by the German tax authorities in order to allocate goods and services used for the construction or acquisition of a mixed-use building is also applied to the goods and services purchased for the use, conservation or maintenance of such buildings. Consequently, the referring court raises the question whether it is compatible with the Sixth Directive to apply one and the same method to both those categories of expenditure.
In the second place, the referring court establishes that, whilst the Court of Justice has already had occasion to acknowledge that a legislative amendment may give rise to the obligation to adjust certain VAT deductions, it has hitherto ruled only on legislative amendments affecting the very existence of the right to deduct. That being so, doubt remains as to whether Article 20 of the Sixth Directive precludes legislation of a Member State in so far as that legislation requires a VAT adjustment following the amendment by that State of the method for allocating VAT paid on mixed-use goods and services.
In the third place, the referring court is uncertain whether, in the circumstances of the main proceedings, the principles of the protection of legitimate expectations and of legal certainty preclude a VAT adjustment being made. It notes, first of all, that the German legislation does not include an express provision according to which the entry into force of the third sentence of Paragraph 15(4) of the UStG is liable to give rise to adjustments. Next, that legislation does not lay down transitional arrangements, although it follows from paragraph 70 of the judgment of 29 April 2004 in Gemeente Leusden and Holin Groep (C‑487/01 and C‑7/02, EU:C:2004:263) that the adoption of such arrangements is required when the persons to whom a new rule is addressed are liable to be surprised by its immediate application. Finally, the method for assigning mixed-use goods and services that was used by Rey Grundstücksgemeinschaft had been accepted, for the 2001 and 2002 tax years, by the tax authorities, following proceedings before the Finanzgericht Düsseldorf (Finance Court, Düsseldorf).

Questions

1. The Court of Justice of the European Union has ruled that the third subparagraph of Article 17(5) of [the Sixth Directive] allows Member States, for the purposes of calculating the proportion of input VAT deductible for a given operation, such as the construction of a mixed-use building, to give precedence, as the key to allocation, to an allocation key other than that based on turnover appearing in Article 19(1) of the Sixth Directive, on condition that the method used guarantees a more precise determination of that deductible proportion (judgment of 8 November 2012 in BLC Baumarkt, C-511/10, EU:C:2012:689).

(a) At the time of acquisition or construction of a mixed-use building, for the purposes of calculating more precisely the deductible amounts of input tax, must inputs the basis of assessment of which is part of the acquisition or construction costs be attributed initially to the (taxable or exempt) turnover of the building and only the remaining input tax be attributed by reference to a floor area-based or turnover-based allocation key?

(b) Do the principles established by the Court of Justice in its judgment of 8 November 2012 in BLC Baumarkt (C‑511/10, EU:C:2012:689) and the answer to the foregoing question apply also to amounts of input tax on inputs for the use, conservation or maintenance of a mixed-use building?

2. Is Article 20 of the Sixth Directive to be interpreted as meaning that the adjustment provided for in that provision as regards the initial input tax deduction applies also to circumstances in which a taxable person has attributed input tax arising from the construction of a mixed-use building in accordance with the [turnover-based allocation key] provided for in Article 19(1) of the Sixth Directive and permitted by national law, and during the adjustment period a Member State subsequently provides that a different allocation key is to take precedence?

3. If the answer to the previous question is in the affirmative: Do the principles of legal certainty and of the protection of legitimate expectations preclude the application of Article 20 of the Sixth Directive if, for cases of the type described above, the Member State has neither expressly required input tax to be adjusted nor adopted any transitional arrangements, and if the input tax attribution applied by the taxable person in accordance with the [turnover-based allocation key] had previously been recognised by the Bundesfinanzhof (Federal Finance Court) as being generally appropriate?

AG Opinion

The first subparagraph of Article 17(5) and Article 19(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as precluding a Member State from giving precedence systematically and indiscriminately for all ‘mixed-use’ goods and services to any method of calculating the extent of the right to deduct input value added tax other than the allocation key based on the ratio between the turnover to be generated by the letting of the commercial units (which is subject to value added tax) and the turnover arising from other letting transactions (which are exempt from value added tax). Having failed to identify clearly the transactions to which the alternative method or methods of calculation apply, which must, moreover, guarantee a more precise result than that which would arise from application of that allocation key, the Member State concerned cannot enforce the application of those other methods vis-à-vis taxable persons.

Decision

1. Article 17(5) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that, where a building is used in order to carry out certain output transactions in respect of which value added tax is deductible and others in respect of which it is not, the Member States are not required to prescribe that the input goods and services used for the construction, acquisition, use, conservation or maintenance of that building must, in a first stage, be assigned to those various transactions when such assignation is difficult to carry out, in order that, in a second stage, only the deduction entitlement due in respect of those of the goods and services which are used both for certain transactions in respect of which value added tax is deductible and for others in respect of which it is not is determined by applying a turnover-based allocation key or, provided that this method guarantees a more precise determination of the deductible proportion, on the basis of floor area.

2. Article 20 of Sixth Directive 77/388, as amended by Directive 95/7, must be interpreted as requiring value-added-tax deductions made in respect of goods or services falling within Article 17(5) of that directive to be adjusted following the adoption, during the adjustment period in question, of a value-added-tax allocation key used to calculate those deductions that departs from the method provided for by the directive for determining the deduction entitlement.

3. The general principles of EU law of legal certainty and of the protection of legitimate expectations must be interpreted as not precluding applicable national legislation which does not expressly prescribe an input tax adjustment, within the meaning of Article 20 of the Sixth Directive, as amended by Directive 95/7, following amendment of the value-added-tax allocation key used to calculate certain deductions or lay down transitional arrangements although the input tax allocation applied by the taxable person in accordance with the allocation key applicable before that amendment had been recognised as generally reasonable by the supreme court.

Summary

Goods and services used for both taxable and exempt transactions (mixed-use goods and services)

In the event that a building is used at a later stage for the performance of certain transactions giving rise to a right to deduct and others not giving a right to deduct, Member States are not obliged to provide that the goods and services have been used for the creation, acquisition, use, conservation or maintenance of this building, are primarily intended for these various operations, where such use is difficult to implement, so that, in the second instance, only the right to deduct to be allocated in respect of those goods and services used for transactions giving rise to a right to deduct as well as for others not giving a right thereto, shall be determined by applying an allocation key according to turnover or,provided that this method ensures that the pro rata of the deduction is determined more precisely, according to the area.

VAT in respect of goods or services deducted pro rata must be revised following the determination, during the adjustment period considered, of a distribution key of this tax used to calculate this deduction, which differs from the method for determining the right to deduct referred to in the same directive.

The general principles of European Union law of legal certainty and the protection of legitimate expectations must be interpreted as not precluding applicable national legislation which does not expressly require a review, within the meaning of Article 20 of the Sixth Directive, the input tax resulting from the change in the VAT distribution key, which has been used to calculate certain types of deduction, does not provide for transitional arrangements, although the distribution of input VAT made by the taxable person on the basis of the distribution key applicable to this change was recognized by the highest court as generally reasonable.

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